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The Do’s and “Do’hs!” of running an SMSF

Disclaimer: Six Park is not authorised to advise or deal in superannuation products, and no statement about SMSF's in this release constitutes or is intended to constitute financial product advice about superannuation.

Having a self-managed super fund (SMSF) is increasingly popular (Read here). but it also comes with a range of administrative, compliance and reporting requirements.  This article sets out some of the key rules which all SMSF owners need to be aware of and comply with.   If your SMSF fails to meet these requirements, then it may be deemed ‘non-complying’ by the ATO and you may face a variety of potentially significant tax consequences and financial penalties.

Amongst other legal requirements you must consider, it is important that your fund:

1) Meets the SMSF definition  
2) Meets the ‘sole purpose test’ 
3) Has suitable trust deed that is suitable for the fund 
4) Is an ‘Australian Superannuation Fund’ 
5) Formulates and implements an appropriate investment strategy 
6) Complies with all superannuation laws 
7) Not breach any investment restrictions

Let’s consider these points in turn:

(1) Meeting the SMSF definition

To meet the legal definition of an SMSF, your fund must meet certain requirements:

• Have less than 5 members;
• All members must either be
    (i) trustees of the fund in their personal capacity, if your SMSF has an individual trustee structure, or
    (ii) directors of the corporate trustee, if your fund has a corporate trustee. You can read more about the different trustee structures here;
• If you are the only member of your fund, your SMSF must either have
    (i) a corporate trustee structure (where you are the sole director or one of 2 directors) or
    (ii) two individual trustees (where you are one of the trustees).
• No member or trustee of your SMSF can be an employee of another member of the fund (unless the members are relatives) or receive any remuneration from the fund; and
• Generally all trustees must be members of the fund, although there are some limited exceptions (e.g. for single member funds and where a member is a minor)

(2) Meeting the ‘sole purpose test’

Your SMSF must be run for the sole purpose of providing retirement benefits for its members or their dependants. You cannot use your SMSF to try to get early access to your super or to obtain personal use of super fund assets (e.g. such as holiday home or artwork) without adequate compensation.   More information about the sole purpose test is available here.

(3) A suitable trust deed

Every SMSF must have a trust deed – i.e. a legal document which sets out the rules of the fund and how it will operate. Your SMSF’s trust deed must be properly prepared and executed and also regularly reviewed and updated as necessary. By law, your fund’s trust deed is also required to impose certain minimum obligations on its trustees. These include (amongst other things) a requirement that
    (i) trustees act honestly and in the best interests of the fund’s beneficiaries and
    (ii) manage the fund’s assets and reserves responsibly and appropriately.
As an SMSF trustee, you must comply with all of your fund’s trust deed provisions (penalties apply if you don’t!) and also ensure the trust deed remains consistent with the SMSF legislation.

(4) An “Australian Superannuation Fund”

In order to comply with superannuation regulations and benefit from concessional tax treatment, your SMSF must be considered an “Australian Superannuation Fund”. To meet this definition, the central management and control of your SMSF (with some limited exceptions) must be in Australia.  In addition, at least 50% of the fund’s assets must relate to members who are Australian residents. Further information on these tests are set out in ATO Taxation Ruling TR 2008/9

(5) Formulating and Implementing an Investment Strategy

As an SMSF trustee, you are required by law to formulate an investment strategy for your SMSF. The investment strategy is basically a financial plan which sets out how you will invest and manage the fund’s assets. This plan needs to take into account the fund’s investment objectives and the financial needs of each of member (framed in the context of their risk profiles). It should set out the specific investment policies of the fund and the various matters (such as diversification, risk, liquidity, asset allocation) which should be taken into account when managing the fund’s investments. You are also required to regularly review (and where necessary amend) the fund’s investment strategy to ensure its ongoing appropriateness. Further information on the investment strategy requirements can be found here.

(6) Compliance with super laws

If you have an SMSF, you are responsible for ensuring your fund:

• Complies with all tax laws and regulations. This includes ensuring all contributions are treated properly (e.g. all members aged 65+ must satisfy a work test before contributing) and all benefit payment rules are observed;
• Meets all record keeping and compliance obligations, such as lodging annual statements and maintaining accurate minutes of all trustee meetings and decisions; and
• Is audited each year by an approved SMSF auditor;  If your SMSF fails to comply with these requirements, the tax and financial consequences can be significant and can result in imprisonment, removal of trustees and/or substantial fines and penalties.

(7) Investment restrictions

There are a range of superannuation specific investment rules which all funds are required to abide by. In addition to those already outlined above, and amongst other things SMSF trustees are:

• Required to keep all SMSF assets separate from their personal money;
• Take steps to protect the ownership of fund assets
• Prohibited from lending or providing financial assistance to fund members or relatives of fund members
• Required to ensure all investments are made on an arm’s length basis; - that is;
• Prohibited from purchasing assets from fund members (certain exceptions apply for listed securities, business real property or managed funds)  • Required to manage the SMSF separately from their personal and business affairs;
• Prohibited from borrowing on behalf of your SMSF (again certain exceptions apply in some circumstances); and
• Ensure the SMSF does not have more than 5% of its assets invested in funds or arrangements with related parties.

Final Note

Ultimately, an SMSF can be a flexible way to manage your superannuation, but it does entail significant responsibilities and commitments. It is important to understand both the advantages and the risks that come with operating an SMSF, and if appropriate, to seek professional advice from your accountant or tax adviser about setting up an SMSF.

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